Neflix finds a way to alienate investors as well as customers

The heady days of ubiquitous red envelopes and easy money are long gone (AP)

Netflix, whose shares have plunged more than 75 percent since June, has found away to add insult to investors’ injury. The company’s stock slide, of course, comes from its disastrous handling of a midsummer price increase and its decision, later abandoned, to split its DVD and streaming video business. As if watching shares tumble from more than $304 this summer to almost $70 this week wasn’t bad enough, Netflix management decided to pile on.

On Monday, it announced it sold 2.86 million shares of stock at $70, raising $200 million, and sold another $200 million in debt that’s convertible to stock at $85.80. The company is trying to augment the $366 million in cash it had on hand at the end of September. As the Wall Street Journal points out in today’s Heard on the Street column, it didn’t have to be this way. Since 2007, Netflix has spent more than $1 billion of its cash buying back its own stock, and its executives, including embattled chief executive Reed Hastings, have been selling shares during that time.

In much the same way it bungled the pricing and DVD split this summer, Netflix management failed to plan for any possible slowdown in the company’s growth. It apparently thought customers would continue to sign up for its movies at the same rate they always had. Now, the company faces a wave of customer cancellations that’s showing no sign of abating, and the company has said it expects to lose money this year. For the year ended in September, free cash flow was $204 million, while the company also spent $200 million on stock buybacks, the Journal reported.

While executives got to take money out of the company, investors who’ve held onto their shares haven’t been so lucky. Now, Netflix is diluting the value of their holdings essentially to pay for rewarding a management that has failed both customers and shareholders.

As the Journal points out, the only way out of this downward spiral is a rise in subscriptions for Netflix’s streaming video service. That’s not going to be easy. Customers are leaving because the selection is terrible. Because Netflix has spent so much money on itself, it’s not clear if it has the cash needed to land licensing agreements for better movies.